Sunday, April 27, 2008

Analysis of the US Dollar and Gold Stocks

Gold dropped about $26.00 dollars an ounce this week, and gold stocks fared even worse, with the XAU losing 6.6% for the week. In the previous post I wrote on Tuesday, I said that an explosive move was likely due. Hopefully, from what I have been writing recently, you were able deduce which way I thought that move would be.

The following chart is a daily chart of the HUI index. I posted this same chart on April 13th, and I am posting it again since I think that it explains what has happened this week:

The central theme of the above chart is that gold stocks tend to correct in three waves, and this correction was no exception.

One of the reasons that gold stocks performed so poorly this week is because the USD has broken out of a triangle formation, which was building up for the last 3 weeks:

Notice how volatility, as measured by bollinger band width, signaled this breakout. The same indicator that was used in the above chart helped show me that a breakdown was due for gold stocks.

The next chart, which took me about 15 minutes to annotate, shows the Euro on the top panel, and what I call an intermarket MACD on the bottom panel. The last time I showed this type of chart was in this post.

As you can see, there has been a negative crossover on the MACD, which has triggered a Euro sell signal. A declining Euro will likely put pressure on gold prices, and also may drag Crude Oil prices down as well.

On the bright side, gold stocks are starting to near some potential areas of support. The following chart is a daily chart of GDX:

If you are a long term precious metals holder, like myself, then you could probably take some solace in the fact that GDX is nearing an unfilled gap, which may offer support. We'll have to wait and see what sort of candle emerge at this level.

Furthermore, silver prices are within 10% of a major area of support, which means the amount of pain left for the silver bulls to endure is certainly limited:

So the bottom line is that the US Dollar will likely rally for the next little while, and this means that the gold stocks correction is not quite over, but there is certainly some light now visible appearing at the end of the tunnel.

I will try to write a mini post on Tuesday again.

Tuesday, April 22, 2008

A Brief Look at Bollinger Bands

The following chart shows a gold index called the Dow Jones United States Precious Metals index, (DJUSPM). The index has a different gold stocks composition than the HUI or XAU Indices, and, as such, can sometimes give you a different perspective.

The main point in the above chart is that this index continues to trade sideways, within a very narrow band. As this is occurring, the bollinger bands are beginning to tighten, and the width of these bands are shown in the indicator on the bottom panel.

In my opinion, explosive moves, either up or down, are preceded by times of extremely low volatility.

Saturday, April 19, 2008

A Look Back at Gold

Gold dropped about $12.00 this week, while gold stocks and silver fared slightly better. In this post, I am going to reexamine the charts that I posted two weeks ago, since I believe that post explains most of what happened this week.

The first chart we have is a daily candle chart of gold:

Last month, when gold reached $1000 an ounce, I began hedging my long term precious metals investment by buying an inverse gold ETF. Shortly afterwards, gold plummeted about $100 in a matter of days. The question since that drop was whether it represented the entirety of the correction, or whether another leg down was to come.

Although I suspected another wave down was due, I also let the above chart help me decide. This is because a chart like the one above will keep you on the right side of the short term trend.

Two weeks ago, I said that one of the reasons gold was so strong was because there was a lot of scared money going into this market, and also going into the Swiss Franc, as these are considered safe haven investments.

I also mentioned that one way to determine the degree of normality in the markets was to observe a chart of the VIX. Here is an update of that chart:

As you can observe, the VIX has broken its support line and its 200 day moving average. This shows that the markets are returning to normal, at least for now, and that has given a boost to stocks, and to financials in particular. As the markets return to normal, safe haven investment become less desirable, and this is seen in an updated Swiss Franc chart:

Notice how the triangle formation has failed, and this failure took place at the very critical 1oo area.

Another dimension to this weeks stocks rally was a falling Japanese Yen. I mentioned two weeks ago that the Yen is currently overbought, near round number resistance, and is looking weak due to the bearish candle put in. Here is an update of that chart:

The Yen's failure this week certainly contributed to the Dow's 525 point gain this week. I believe money flowing into equities came out of the gold market, which I believe explains why gold dropped $27.00 yesterday.

Sunday, April 13, 2008

The HUI Index and US Dollar Index

Gold and gold stocks were more or less unchanged for this past week. In the last two posts, I said that I was getting mixed messages from the charts I analyze, which seems to make sense now, as the bulls and bears are at about equal force.

I doubt, however, that gold stocks will continue to grind sideways for much longer. Let's have a look at a daily chart of the HUI:

What I am concerned about is that gold stocks may have another leg down coming. If this were the case, it would make this correction very similar to the last 2 corrections, as the above chart illustrates.

The next chart is a daily chart of GDX, which is basically an ETF that follows the HUI. One characteristic that GDX does a better job at showing though is gaps. The chart below shows that there is an unfilled gap. Most gaps tend to be filled at one time or another:

Furthermore, GDX's price action has been contained in a trading range outlined by the 2 black lines above. A break across either line will let you know who is in control; the bulls or the bears.

Finally, notice how the Bollinger Bands contracted right before the previous correction. This is because Bollinger Bands help measure volatility, and periods of low volatility tend to precede periods of high volatility.

Finally, whether or not we are due for another wave down will depend on how the US Dollar holds up. Here is a weekly chart showing the USDX:

The fact that the USD has not made a lower low in 5 weeks could be taken as evidence that the currency could be in the process of cratering short term. Nonetheless, the US Dollar is in a killer downtrend, so I would not go long this currency.

I still think that Gold could hit $1,200 an ounce, and Silver $30.00 an ounce before the year is out, and I am still dollar cost averaging into physical silver even now, since, we are, after all, in a long term bull market.

Thursday, April 10, 2008

Interesting ETFs

In this post, I thought I would discuss some neat new investment products that I have recently come across. The first one is a product you may have heard of. It is called the Uranium Participation Corp, and, according to their corporate website, the fund's objective is to:

invest substantially all of its assets in uranium, either in the form of uranium oxide in concentrates or uranium hexafluoride, with the primary investment objective of achieving appreciation in the value of its uranium holdings. The objective of the Corporation is to provide an investment alternative for investors interested in holding uranium.

Here is a weekly chart of this investment:

What I find interesting about the above chart is that there is a large triangle forming, which certainly has the potential for an upside breakout. So far, however, Uranium is one of the only commodities that has not rallied over the last several months.

I feel that as oil steadily climbs toward $200.00 a barrel, and natural gas supplies eventually exhaust themselves, we will need to look for an alternative besides fossil fuels. I seriously doubt that solar or wind could come online fast enough to replace oil and gas.

For example, half of surface area of California would have to be covered in solar panels just to get the energy we are now currently getting from oil. And we may not even have sufficient resources that are essential for solar panel production, like Indium, to be capable of that task.

Anyway, back to the technicals, here is a daily chart of this fund:

It seems to me that Uranium traders are a technically oriented group. Notice how the price bounces off of the 200dma, like clockwork. I find the potential triple bottom currently forming fascinating.

Another commodity that probably very few people pay attention to is livestock. Livestock and Uranium are literally the only 2 commodities that have not taken off this year. There is an ETF that follows this sector, and the ticker is COW:

I am not going to pretend to be an expert on this subject, but one would think that with the price of grains increasing at such a rapid pace, that eventually that would trickle down and affect livestock prices.

Finally, one commodity that I feel particularly bullish on right now is Copper. If you have a glance at a weekly copper chart, you will see what looks like some fairly serious coiling action:

Copper also seems much less overbought than precious metals, as it has been consolidating, building energy, for almost 2 years now.

The best way to invest in copper is via physical ownership, and I explained how one could go about doing this in this article. If you are serious about playing copper, and you want physically ownership, then you may be interested in this video.

If you prefer to hold your wealth in paper form, there is a new ETF that does track the price of copper:

And remember, this is not a recommendation to buy or sell any security. You are responsible for your investing. Thanks for visiting.

Sunday, April 6, 2008

Gold, Swiss Franc, and Vix

Gold started the week with very little strength, but firmed up towards the end, closing down only about 2.5% for the week. I mentioned in the last post that I was getting mixed signals, and I was not confident of which direction gold would pursue.

Since it is not always possible to feel confident about the direction of a market, one must develop a method for making money in the market in times of ambivalence. Successful traders can make money without feeling confident about which way the market will move, and they do this by following the trend, and managing risk.

There are several ways of determining trend, but one of the simplest is through the use of moving averages. The following chart attempts to divide gold into up trend and down trend segments using moving averages:

The above chart, just like all the charts I post, shows a 9 day exponential moving average in red and 20 day moving average in blue. The purpose of the lines is to determine the short term trend. Furthermore, the indicator on the bottom panel of the chart is a modified MACD that displays the distance between the two lines.

When the MACD line is above zero, that means that the 9 day EMA is above the 20 day EMA, and this means that the short term trend is up. Currently, however, the opposite is true, and, therefore, the short term trend is down.

If we were purely trend traders, the above chart would probably be all the analysis that we would have to do. However, I let's explore some intermarket analysis:

The above chart is a daily chart of the Swiss Franc. Gold and the Swiss Franc exhibit a fairly tight correlation, so I usually keep an eye out on this currency. What strikes me about the above chart is that the Swiss Franc may be topping out at the psychologically important 100 area. The 100 area means that it takes 1.00 Francs to buy an American Dollar. Also notice the divergence on the RSI.

I think that one of the reasons the Swiss Franc went parabolic was because this currency, like gold, is considered a safe haven investment. What could hurt the Swiss Franc would be a temporary return to normality in the equity markets.

One way to gauge normality in the markets is to look at the Volatility Index or the VIX. The VIX measures the average implied volatility of the options of the 500 stocks that make up the S&P 500. When things start hitting the fan, the VIX will tend to shoot up, and when things are normal, the VIX will trend downward.

Let's have a look at the VIX:

In the above chart, the VIX is displayed on the top panel and the SPX is on the bottom panel. What I find interesting is that the VIX is being compressed into a very large triangle formation. Also notice that whenever the VIX has found support, the SPX has fallen precipitously. The resolution of this triangle will certainly have an impact on the need for safe havens such as the Swiss Franc and gold. A break below the support level would be bullish for stocks, and potentially bearish for gold.

Another intermarket relationship that I like to observe, and I know a lot of bloggers and analysts look at this too, is the relationship between the Japanese Yen and stocks:

For reasons explained elsewhere on this site, the Yen and stocks tend to trend in the opposite directions. The main point for the above chart is that the Yen is currently overbought, near round number resistance, and is looking weak due to the bearish candle put in.

Finally, one last chart that caught my eye this week is a chart of Canadian Financials. I've never been good at predicting movements in banks, but I can't help but think that the chart below looks bullish:

Anytime an index or stock gaps above its 50 day moving average, you know the bulls are in control. Also notice how the 50dma was resistance for the entire move down. The candle and volume patterns also look favorable to me. Perhaps the bears will give this sector a break for a couple of weeks. I will release an additional post on Wednesday.